Barclays cool ahead of Tesco results

The group's new broker painted a mixed picture ahead of Tesco's half-year
numbers.

If Tesco’s management had been hoping for a glowing appraisal from analysts at their new house broker, they would have been left disappointed today.

It emerged last week that Barclays had been appointed corporate broker to the supermarket giant after the FTSE 100 company parted ways with JPMorgan Cazenove and Nomura. The British group joined Deutsche Bank, which was retained as advisor to Tesco.

By way of explanation for the change, the supermarket company said it undertook “periodic reviews of all our advisory service providers”, which was “good practice”. Nevertheless, news of the broker switch inevitably prompted speculation as to whether analyst research had been a factor in the decision to change advisors: experts at both Nomura and JPMorgan had not shied away from lowering forecasts on Tesco.

Today, analysts at newly recruited Barclays issued their first note on Tesco since the bank became house broker, and they didn’t appear to pull any punches either.

The news from the group’s half-year results next week was likely to be “mixed”, the Barclays analysts argued. They left their rating and target price unchanged at “equal weight” and 365p respectively, but trimmed their estimates, in part to account for currency movements.

“We think the UK gross margin outlook appears less aggressive than the market has typically feared, which should have the effect of making Tesco’s 5.2pc margin target appear more credible,” the analysts said, adding that they had been impressed with the refurbishment of the group’s Extra store in Watford.

However, Barclays also highlighted that there was cause for caution.

“Tesco faces challenges in quite a number of its international markets, as will likely be evident from material [like-for-like] sales declines in [the first-half],” the analysts said. “We look for the company to better explain how it plans to tackle its international performance.”

Tesco shares drifted 2.05 lower to 374p, not helped by new data from Kantar indicating the company was continuing to lose market share year-on-year. The supermarket group moved against the wider trend, with the FTSE 100 edging up 14.09 points to 6,571.46. Nervousness over a looming political clash on the US debt ceiling weighed on investor sentiment and limited the gains.

Liberum Capital analyst Kate Craig said she was broadly downbeat on the sector, arguing that “share prices are baking in a near-term gold price recovery which we don’t expect to materialise”.

Africa-focused Randgold was her “top pick” of the precious metals producers. The company fell today despite disclosing that its Kibali mine in the Democratic Republic of Congo had begun production, ahead of its original target of a start-up by the end of the year.

Meanwhile, Egyptian gold miner Centamin slid 0.18 to 44.63p amid disappointment that the long-awaited legal hearing on its right to dig at its only operating mine had been referred to another court.

The shares, which fell as much as 2.49p today, plummeted last October when Centamin’s lease for the Sukari mine was annulled by Egypt’s administrative court, and the company has since appealed that decision.

Nervousness about the outcome of the appeal has dogged Centamin shares ever since the shock ruling last year. The next hearing is scheduled for November 19.

Back in the benchmark index, cruise operator Carnival slumped 134p to £22.58 on weak third-quarter numbers.

Engineering company Amec was another faller after analysts at UBS sounded a note of caution on the group’s organic growth prospects.

They cut their recommendation on the oil, gas and mining services company to “neutral” from “buy” and said: “While we like the asset-light business model, we worry about the underlying slowdown in activity in Amec’s end markets.” The shares declined 17p to £10.91.

Elsewhere in the blue-chip index, a banking conference held by Bank of America Merrill Lynch drew attention to the lenders. Among those companies presenting to investors were Royal Bank of Scotland, up 6.9 at 367.9p, and Lloyds Banking Group, 0.3 better at 74.21p.

Financial magazine publisher and events group Euromoney Institutional Investor climbed 98p to £11.49 after pleasing with its latest trading update. The FTSE 250 company said fourth quarter underlying revenue was expected to rise 5pc compared with a year earlier, which Numis analyst Gareth Davies described as “encouraging”.

Fellow mid-capper Close Brothers, the investment bank, also impressed with its full-year results and rose 56p to £11.89.

Outside the second-tier index, oil explorer President Energy advanced 1½, or 6.4pc, to 24.875p after the group updated the market on the size of its concessions in Paraguay. The company said that a potential total resource of more than 500 million barrels of oil “could be a realistic possibility”.

Deal news saw Oracle Coalfields surge 43.5pc, or 0.675 to 2.225p. The small-capper said it had signed a two-year joint development agreement with a subsidiary of state-owned company China National Machinery Industry Corporation for its open pit coal mine and power plant project in Pakistan.

The government-controlled firm will help Oracle secure debt financing from banks in China.